Turkey: Hold Off On Currency & Bonds, Citi Says

By Dimitra DeFotis

While Turkey’s central bank could stop cutting rates soon, Citigroup says investors should not jump into Turkish currency and debt.

In today’s trading, Turkey’s lira strengthened by 0.7% against the dollar after Yigit Bulut, a senior aide to President Recep Tayyip Erdogan, said Turkey’s central bank on Thursday may pause rate cuts that began in March, according to Bloomberg. It is a view that has been conveyed to a team of Citi analysts including David Lubin, Luis E. Costa, Adriaan Du Toit, Toller Hao and Nivedita Sunil, who wrote today that “fiscal expansion is on the rise in Turkey and that changes the whole equation in TRY FX and interest rates.” They add:

“We are finalising two days of marketing with Turkish local clients, most ALM desks and bank treasurers. … We remain underweight TRY and underweight duration in TURKGBs [Turkish government bonds] in the model portfolio. We are now moving our South African rand (ZAR ) underweight back to neutral in the model portfolio as the USD seems to be running out of steam and local political headlines have become a bit more balanced …

There is a common perception the Turkish Central Bank will stop ‎cutting rates soon (maybe after the next 25bp cut in the upcoming meeting). The conviction has obviously risen after [economic advisor Cemil] Ertem’s comments. But it is interesting that this view collides with the perception that growth keeps ticking lower in Turkey, and the government’s economic team seems to be eager to support growth over the next quarters. So, why not further cuts in the rates corridor? The Central Bank is conducting policy under a very strong assumption – that core markets’ monetary policy will not “shake the boat” further. We believe this is a very strong assumption in times of indigestion in European rates. Locals are also counting with the continuation of the retail USD sell flows (via direct USD sales and via the swap from FX deposits to local currency deposits) ….

‎There has been a lot of push back on our view on Turkish fiscal impulse (one of the largest in emerging markets now). Local investors seem to be inclined to believe the MinFin comments on fiscal prudence going forward. Our view on that: 1) a significant fiscal impulse should not be necessary to fully stop the current account rebalancing on Turkey. 2) If we are indeed heading towards fresh elections in 2017, how do you believe the fiscal will behave in the following quarters? … “

This year, the iShares MSCI Turkey exchange-traded fund (TUR) is up 4.5% and the Turkish lira (TRY) is weaker by 5% against the U.S. dollar (USD). That reflects fear that Turkish assets will face pressure as the U.S. Federal Reserve raises interest rates. It also reflects the country’s fraught domestic politics, especially after the coup attempt in July.

“… Turkey will rapidly carry out economic reforms and further improve the investment environment during the state of emergency … [with] a new and unique economic policy path that is not stuck in poor medium-term programs and impositions by credit rating agencies … I would not say that Turkey must follow a path that is completely different from the outside world and that does not properly understand the existing situation. I would simply say that countries like Turkey should not do something different from what the U.K. is doing these days …Turkey is stepping into a new period where markets will operate more actively in a more open and improved investment environment and where financial markets will work in a more efficient and healthier way.”

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.